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Why Boeing Outperformed the Broader Market in August

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After falling 6.3% in July, Boeing (BA) stock made a strong comeback last month. The stock gained 6.7% in what was a highly volatile August, during which all three major US indexes closed in the red.

The escalation of the US-China trade war and global economic recession concerns kept the broader market on a downward trajectory last month. The Nasdaq, S&P 500, and Dow Jones indexes fell 2.6%, 1.8%, and 1.7%, respectively.

Boeing’s August return was also higher than that of the iShares U.S. Aerospace & Defense ETF (ITA). The ETF’s portfolio consists of companies that manufacture, assemble, and distribute aerospace and defense equipment. ITA gained 3% in the month.

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Boeing’s YTD performance

August marked Boeing stock’s highest one-month return since the worldwide grounding of its 737 MAX planes in mid-March. Its stock has fallen significantly since mid-March following the deadly crashes of two of its 737 MAX planes within five months of one another. Since March, the stock has registered a decline in every month except June and August. In June, Boeing shares gained 6.6%.

Boeing stock has lost approximately 14% of its market value since the Ethiopian Airlines crash on March 10. Its YTD (year-to-date) return has also fallen to 12.9% as of August 30 from approximately 31% as of March 8. Moreover, until March 8, Boeing was the Dow 30 component’s top performer, but it’s now fallen to 17th place.

Boeing stock’s YTD return is much lower than the gains of ITA as well as major US indexes. ITA, the Dow Jones, the S&P 500, and the Nasdaq are up 28.3%, 13.2%, 16.7%, and 20%, respectively, YTD.

Boeing stock gained on hopes for MAX planes

Boeing stock soared last month on hopes for the sooner-than-expected return of its troubled 737 MAX aircraft to service. A series of positive news in the previous month instilled confidence among investors that the company could get the necessary regulatory safety approvals in October.

Earlier, industry experts were expecting a delay in the company’s receiving regulatory approval. Such a delay would push MAX’s return to the skies to next year. However, if Boeing gets safety approval in early October, airlines should be able to resume their MAX services in December.

The first significant news came on August 1, when the Seattle Times reported that Boeing was considering redesigning the whole architecture of its flight control system. The news indicated that Boeing was looking for a complete solution to MAX’s problem so that the grounding didn’t drag on further.

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Muilenburg’s comments

After that, Boeing CEO Dennis Muilenburg’s positive comments about MAX’s software fix in September raised hopes of its quick return. Muilenburg reiterated his views on August 7 at the Jefferies Global Industrials Conference, according to an AeroTime report.

On August 20, the news of Boeing hiring over 100 temporary staff members further raised optimism about its MAX jets. According to the company, these temporary employees will help get the grounded 737 MAX planes ready for delivery. The company’s move reflects its planned strategy to hasten the delivery process as soon as it gets regulatory approval.

An August 22 Reuters report stated that Boeing is planning to ramp up the production of its MAX planes to return to growth once again. According to the report, Boeing intends to increase the monthly output of its MAX jets by five units to 47 units in October. After that, it plans to raise the monthly production rate to 52 units in February 2020 and a record 57 units in June next year.

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MAX crisis financial impact

The 737 MAX’s quick return to the skies has become necessary for Boeing’s financials. Due to the MAX grounding, the company’s overall commercial aircraft shipments fell 54% YoY (year-over-year) to 90 units in the second quarter. As a result, its quarterly revenue fell 35% YoY, and it reported a loss for the first time in 12 quarters.

The grounding of Boeing’s MAX jets cost airlines billions of dollars’ worth of foregone revenue and operating profits. In its August 20 report, Reuters estimated that the overall cost associated with the MAX fiasco had already crossed $8 billion. During the second quarter, Boeing booked an after-tax charge of $4.9 billion as an estimated compensation cost to MAX customers.

At 34, Southwest Airlines (LUV) owns the highest number of MAX aircraft among US air carriers. The company has faced over 20,000 flight cancelations since mid-March due to the MAX grounding. It has removed MAX fleets from its flying schedule through January 5, 2020.

Last week, American Airlines (AAL) and United Airlines (UAL) also extended MAX flight cancelations through December 3 and December 19, respectively. American has 24 MAX planes, while United owns 14 such aircraft. In the second quarter, American and United recorded 7,800 and 3,440 flight cancelations due to the MAX grounding.

All three airlines are demanding compensation from Boeing for their losses. According to an August 6 OAG report, the estimated loss to US airlines will cross $4 billion if the MAX planes remain grounded until October.

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